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Earned Value

5 minutes 5 Questions

Earned Value (EV) is a comprehensive metric used to measure a project's health, progress, and performance. It is the actual value of work accomplished until the present moment, based on the initial estimated cost for the given scope. It helps in understanding how much value a project has generated compared to the costs that have been incurred. EV is a key component of Earned Value Management (EVM), which is crucial for managing the costs and budgets of complex projects effectively.

Earned Value Management (EVM) Guide from PMBOK 7th Edition

Earned Value Management is a critical concept in the Project Management Professional (PMP) certification exam. EVM helps measure project performance and progress. Following are some key points:

Importance: EVM allows project managers to track the true cost of the project against the plan. It gives an accurate picture of the project's health, alerting managers when costs are not aligning with the work accomplished. This can pinpoint issues early and provide time for corrective action.

Concept: EVM combines schedule performance and cost performance to answer the question, 'What did we get for the money spent?' It results in metrics, namely Schedule Variance, Cost Variance, Schedule Performance Index, and Cost Performance Index, which help in forecasting, variance analysis and control. The three components of EVM are Planned Value (PV), Actual Cost (AC), and Earned Value (EV).

Workings: Calculate EV as the percentage of the total budget assigned to a task multiplied by the percentage of the work completed. The variance analysis then uncovers project performance and the conformance to the initial projections.

Exam Tips: Understand the formulas (like SPI=EV/PV, CPI=EV/AC etc.) and their implications. Do not memorize them, grasp their essence. Be comfortable with using some basic math for computations. Expect scenario-based questions where you need to compute variances or indexes.

Remember: The greater the variance, the greater the risk. Practice a lot of mock test questions based on this concept and learn to apply EVM on a case-to-case basis.

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PMP - Earned Value Management Example Questions

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Question 1

You're managing a complex IT infrastructure upgrade project with a Budget at Completion (BAC) of $500,000. After 6 months, the project is 40% complete, with an Earned Value (EV) of $200,000 and Actual Cost (AC) of $250,000. The project sponsor is concerned about the cost overrun and wants to know the projected final cost. You decide to use the Estimate at Completion (EAC) formula that assumes the current Cost Performance Index (CPI) will continue. What is the most accurate EAC for this project?

Correct Answer: EAC = BAC / CPI = $500,000 / 0.8 = $625,000

The most accurate Estimate at Completion (EAC) for this project is $625,000, calculated using the formula EAC = BAC / CPI. Step-by-step calculation: 1. Calculate the Cost Performance Index (CPI): CPI = EV / AC = $200,000 / $250,000 = 0.8 2. Apply the EAC formula: EAC = BAC / CPI = $500,000 / 0.8 = $625,000 This formula assumes that the current CPI will continue for the remainder of the project, which is the most realistic assumption given the information provided. The other options are incorrect: The formula AC + (BAC - EV) assumes that future work will be completed at the planned rate, which is overly optimistic given the current cost overrun. The formula involving SPI (Schedule Performance Index) is not appropriate for cost estimation. The last option, BAC + (AC - EV), is not a standard EAC formula and does not accurately reflect the project's performance trend.

Question 2

In a project with a Budget at Completion (BAC) of $100,000, the Earned Value (EV) is $40,000 and the Actual Cost (AC) is $50,000. What is the Cost Performance Index (CPI)?

Correct Answer: 0.8

The Cost Performance Index (CPI) is calculated as the ratio of Earned Value (EV) to Actual Cost (AC). In this case: EV = $40,000 AC = $50,000 Therefore, CPI = EV / AC = $40,000 / $50,000 = 0.8 A CPI of 0.8 indicates that for every dollar spent, the project is generating $0.80 in value. A CPI less than 1 means the project is over budget. The other answer options are incorrect: 1.25 is the reciprocal of 0.8 and would indicate being under budget. 0.4 is calculated by dividing EV by BAC, which is not the formula for CPI. The last option is incorrect because CPI can be calculated with the given information, as PV is not required.

Question 3

A project to develop a new mobile application has a Budget at Completion (BAC) of $500,000. After 6 months, the Earned Value (EV) is $200,000, and the Actual Cost (AC) is $240,000. The project manager needs to forecast the final cost and assess the project's financial health. The sponsor is concerned about potential budget overruns and wants to know if additional funds should be allocated. Using Earned Value Management (EVM) principles, what is the most appropriate action for the project manager to take based on this information?

Correct Answer: Calculate the Estimate at Completion (EAC) using the current CPI and present the forecast to the sponsor.

The most appropriate action for the project manager is to calculate the Estimate at Completion (EAC) using the current Cost Performance Index (CPI) and present the forecast to the sponsor. This approach is based on Earned Value Management (EVM) principles and provides the most accurate and data-driven assessment of the project's financial health. Step 1: Calculate the CPI CPI = EV / AC = $200,000 / $240,000 = 0.833 Step 2: Calculate the EAC EAC = BAC / CPI = $500,000 / 0.833 = $600,240 This calculation indicates that if the current trend continues, the project is likely to exceed its budget by approximately $100,240. Presenting this forecast to the sponsor allows for informed decision-making regarding potential budget adjustments or corrective actions. The other options are less appropriate: Recommending a 20% budget increase is premature and arbitrary, not based on actual performance data. Accelerating the schedule to reduce costs is risky and may not address the root causes of the cost overrun. While calculating CPI and SPI is useful, implementing corrective actions before making forecasts delays providing crucial information to the sponsor about the project's financial status. By calculating and presenting the EAC, the project manager provides a data-driven forecast that enables the sponsor to make informed decisions about additional funding or necessary corrective actions.

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